Please note that this News item is not maintained, and reflects the law as at the date of publication or update.
If the owner of a commercial property wants to grant a lease of their property to a tenant, they may have concerns about the proposed tenant’s ability to comply with the lease covenants, such as the promise to pay the rent. Such concerns often arise where the proposed tenant is a newly incorporated company, where the lease will be the tenant’s only asset or, if they are available to review, the tenant’s accounts show insufficient profits to cover the rent and/or to otherwise comply with the usual tenant covenants.
To provide the landlord with a degree of protection, it can request additional security from the tenant to try to ensure the tenant’s compliance with its obligations under the lease. The forms of security a landlord can request include:
A Guarantor
A guarantor is a third party who agrees to guarantee the tenant’s obligations under the lease. If a person or entity agrees to be a guarantor, and if the tenant fails to meet their obligations under the lease, such as to pay the rent, the guarantor can be held liable under their guarantee, and the landlord can demand the outstanding rent from them. However, the guarantor isn’t only liable to pay any rent that the tenant hasn’t paid: the landlord can look to the guarantor to remedy any breach of the lease by the tenant.
A guarantor’s liability can be extended further and it is quite usual that if the tenant goes into liquidation (where the tenant is a company) or becomes bankrupt (if the tenant is an individual) and the lease is disclaimed, the guarantor can be required to take a new lease of the property for the unexpired term of the disclaimed lease.
Rent Deposit Deed
Here, a tenant provides a landlord with a sum of money as a deposit. The rent deposit is housed under a rent deposit deed which sets out when the landlord can withdraw from the deposit, which will essentially be when the tenant breaches the lease and the landlord incurs costs as a result. However, the rent deposit can also be used to recover other costs that a landlord may incur, such as if the lease is disclaimed and the landlord needs to re-let the property. If the landlord withdraws from the rent deposit, and under a usual form of rent deposit deed, it must notify the tenant of the withdrawal, but it can also require that the tenant top-up the deposit so that the full amount of the original deposit is again available ready for the landlord to make a further withdrawal(s), if necessary.
The security a landlord will require when granting a lease is a commercial decision for the landlord, weighing up the financial strength of the proposed tenant against the obligations (including financial obligations) it will be subject to under the lease.
Gaby Hardwicke can assist landlords putting in place appropriate additional security, so if you are a landlord of a commercial property looking to grant a lease we will be more than happy to assist.
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